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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.

The author is Associate at Skadden, Arps, Slate, Meagher & Flom

“Singapore-on-Thames” has grow to be a standard meme utilized by politicians to pitch a hypothetical new mannequin for the UK economic system. However ought to the wholesale insurance coverage market in London as a substitute be pushing for a Bermuda-on-Thames regime for the UK reinsurance trade?

With the UK’s wonderful plumbing into world insurance coverage markets, might an anglicised model of the prudential regulatory regime in Bermuda, which has emerged in current many years as a number one marketplace for offloading dangers, flip London into an uncontested world chief in reinsurance? In that case, this might deliver vital capital flows and lots of new jobs to London, with commensurate elevated tax revenues for the UK.

The UK authorities has introduced, and is implementing, its so-called Solvency II reform of capital guidelines resulting in a brand new British regime Solvency UK. Regulators now have a secondary competitiveness and progress agenda. Whereas Solvency II reform has been considerate, the web impact of the adjustments is prone to be restricted. The critique is the reforms are tinkering somewhat than making radical change.

For instance, the web quantity of capital launched by the reforms into funding in UK productive belongings is prone to be tiny compared with the dimensions of the UK economic system. And, pertinently, tiny in contrast with the previously productive capital sucked out of UK company outlined profit pension schemes into conservative funding. This sad “capital lure” is a not insignificant contributor to the UK’s productiveness drawback.

Furthermore, the Solvency II regime isn’t designed round reinsurers. Reinsurance is a classy product solely out there to different insurers. It includes an insurer economically shedding danger to a reinsurer. Certainly, in some regulatory regimes world wide, reinsurance is topic to restricted regulation — recognising that reinsurance is a danger mitigation method for skilled counterparties, based mostly closely on credit standing or contractually-governed collateral — so the system largely self-polices.

Nonetheless, reinsurers underneath Solvency II are topic to the identical advanced and strict guidelines as an insurer writing retail private traces, similar to motor or dwelling insurance coverage for home shoppers. That is hardly proportionate or applicable. In distinction, the Bermuda regime (which is deemed by regulators to be “equal” to Solvency II) is extra of an financial framework than a set of prescriptive guidelines. As a regime for reinsurers, it has labored effectively and has acted as an enormous magnet for enterprise.

How would possibly a ‘Reinsurance UK’ regime work? There are three choices. The pure intuition within the UK for regulatory reform is incrementalism. If we use Solvency UK as a place to begin, there’s a danger that the venture runs into the sand, as understanding which elements of the present regime to strip away would possibly simply be too painful. That may, nonetheless, be in keeping with fashionable follow.

A second strategy could be to undertake the Insurance coverage Capital Commonplace (the ICS) being developed by the Worldwide Affiliation of Insurance coverage Supervisors, tailoring it particularly for reinsurers. That’s a gorgeous possibility, because the ICS is probably going, over time, to grow to be an more and more adopted foundation for insurance coverage solvency regimes world wide, so offers for a considerable diploma of future proofing.

A really thrilling third method could be to have a look at the financial and authorized operation of reinsurers and ask precisely what regulation is making an attempt to realize. In the end, an insurer needs to know that its reinsurers are sufficiently creditworthy and liquid. Reinsurers are inclined to exit of their method to set up and keep stability sheets that place creditworthiness and liquidity past doubt, as a necessity of attracting enterprise. When insurance coverage firms cede danger to reinsurers, they closely scrutinise them both straight or by way of cautious monitoring of their credit standing studies.

Moreover, they might search collateral as a method of safety. May we due to this fact lower via the present solvency regime and say that so long as a UK reinsurer maintains minimal credit standing and liquidity necessities, submits to a regime of fulsome and clear public disclosure and adheres to greatest governance follow, then that must be sufficient?

Mixed with a particular tax regime, Reinsurance UK could be a knockout success for London, given the insurance coverage infrastructure in London already. That actually would result in an enormous web profit for UK tax revenues, new jobs within the London market and create an influx of belongings to be managed and invested in and from the UK. It’s definitely worthy of great consideration.